UK - Pension funds should consider increasing their equity allocations to take advantage of rising yields, Watson Wyatt claims.
The consultant points out that equity yields are currently 1.25% higher than index-linked gilts – the highest difference for 10 years.
Watson Wyatt European head of investment consulting Nick Watts said many actuaries would now consider equities to be cheap compared to bonds on a long-term funding basis.
He also calculates that expected future returns on equities are also at their highest for five years.
Watts stressed: “The response of trustees might be that equities are more attractive and therefore a higher allocation is warranted. We expect a higher future return, but the price is higher expected future volatility.
“Although it is not the investment consultant’s role to advise on the short-term, we are conscious that our clients need to address the complex range of issues presented by the present volatility of the markets,” he added.
But Mercer Investment Consulting head of strategy Andy Green said trustees should weigh up the strength of their parent company in protecting members’ benefits before making further equity investments.
He points out that if trustees take on extra investment risk they will become more reliant on their sponsor company for putting money into their fund if the equity investment does not pay off.
• Watson Wyatt calculates that the FTSE100 and the S&P500 fell 42.5% and 41% respectively from the end of 1999 to July 15 this year.
Over the same period the return on bonds was 20%. A pension fund with a 50-50 equity/bond allocation at the start of this year would – without rebalancing – now be close to 42-58.
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